Slowing Economy, Rising Gas Prices Doesn't Deter One Fund Manager From Brunswick

Record gas prices and a slowing economy would typically prompt investors to run from most companies tied to consumers, especially ones that make recreational boats.

But it hasn’t deterred Don Wordell from owning shares of Brunswick (BC).

“The fact is there’s a slowing economy,  the credit environment is such that’s its hard to get loans and  gas prices are so high,’’  said Wordell, portfolio manager of the RidgeWorth Mid Cap Value Equity Fund, which has just under $300 million under management. “The stock was trading in the mid $30s in the beginning of 2007 and is [now] trading around $16 a share.”

While Brunswick, the Lake Forest, Illinois-maker of recreational boats and parts isn't immune to the macro environment plaguing many industries, Wordell argued the bad news is already reflected in the stock. What’s more, Brunswick posted a profit, albeit a “modest ” one in the first quarter, underscoring the company’s restructuring is paying off, he said. For its first quarter, Brunswick posted net income of $13.3 million or 15 cents a share, marking a 71% decline from last year's first-quarter net income of $45.6 million or 50 cents a share. Despite the big drop in its net income, Brunswick was able to beat analysts’ expectations, which called for net income of 10 cents a share, according to Thomson Financial.

“The stock easily …could see something north of $30 a share in the next two years,” said Wordell, whose fund has owned shares of Brunswick for the past six months and is planning to add to the position. “It has a very compelling valuation,” not to mention the company pays a 3.7% dividend yield.

Brunswick, like other companies catering to the consumer market, has to contend with a slowdown in sales as consumers reign in on spending on big ticket items. Loans aren’t easy to come by as the credit crunch spreads across most areas of the financial markets, which is also weighing on Brunswick.  But Brunswick is positioning itself for when the markets turn around by reducing its manufacturing plants, thus reducing its inventory, said Wordell. It doesn’t hurt  Brunswick caters to the high end of the market all the way down to the low end and everything in between, making it much more diversified, he added.

“From yachts to simple bass boats…it has all kinds of different products,” said Wordell, noting that Brunswick doesn’t only sell its boats in the U.S. but globally.  Its boat parts business also aids in Brunswick’s diversification, said the portfolio manager.

According to Wordell Brunswick is for longer term investors who have the patience to wait for the economy to improve and for gas prices to get more rational. Wordell thinks that should happen soon. He said the economy is currently in the bottoming process and once it stabilizes it will be easier for people to take out loans. And while gas prices are clearly an issue for the boating industry since gas typically costs more on the open seas or on a lake, Wordell thinks that will settle down too.

“Oil is unsustainable at $120 a barrel,’’ said Wordell. “As the financial systems and credit markets stabilizes and the dollar strengthens commodity prices will pull back.”